CLANC (copper, lithium, aluminium, nickel and cobalt) theory is appealing for investors with an eye on battery metals, because it encompasses the big five minerals, but within CLANC there are two metals with outstanding credentials because they’re also getting a Russian kicker – aluminium and nickel.
There are other commodities which could win from Russia disgracing itself by invading Ukraine, an event which might, or might not happen, depending on which side of the bed the Russian president, Vladimir Putin, gets out of on a given day.
Potash could be a winner from a war in Ukraine because Russia is the world’s second biggest producer of the crop fertiliser (20% share), while Belarus (a Russian satellite) is third biggest (17.6%). Canada tops the potash league table with a 31.8% share.
What worries farmers in countries without their own potash industry is that trade sanctions on Russia and Belarus could reduce potash supplies at a time when the price is rising rapidly, up more than 50% since late last year in commonly traded forms of the fertiliser.
A different league for nickel and aluminium
Nickel and aluminium are, however, in a different league because while Russia is the world’s third biggest producer of both metals and trade sanctions are a potential threat to exports the more important factor is increasing demand from energy transition away from fossil fuels to an electric future of just about everything.
In effect, both metals are poised to enjoy what might be called a double-whammy effect with ongoing and strong demand from traditional markets such as stainless steel (nickel) and transports and construction (aluminium) being joined by the demands of energy transition.
Over the past 12-months both nickel and aluminium have risen by more than 50%. Nickel has jumped from US$15,600 a tonne to US$23,378/t, while aluminium has increased from US$2,069/t to US$3,230/t.
Both could go higher if demand continues to outstrip supply and a lot higher if the Russia/Ukraine situation morphs into war, especially for the best quality nickel, so-called class one material preferred by battery makers.
Nickel price to explode
Citi, an investment bank, put the cat among the nickel pigeons earlier this week with a report which warned of a large deficit in class one nickel with low stock levels representing a potential “powder keg” for prices.
What’s caught the eye of Citi analysts is the drying up of stockpiles in primary markets such as the London Metal Exchange where there has been a 68% fall in warehoused nickel from 263,000t in April last year to 84,894t this week.
The bank’s forecast for the next three months is for nickel to rise by another 11% to US$26,000/t, but with the potential explode to US$30,000/t – a price not seen since the nickel boom of 2008.
For local producers of class one nickel, the material generally produced in nickel sulphide orebodies of the sort found around Kambalda in WA, the outlook is especially promising.
“We see a continued deficit of class one nickel in the first half of 2022, keeping stocks critical if not drawing down further,” Citi said.
“This sets the market up for some explosively bullish price action as the market gains conviction in China’s recent credit easing (to boost construction) and turns its focus from the US central bank interest rate tightening cycle.”
“Sanctions on Russian metal are not in our base case but offer another potential path for higher prices.”
Bull vs bear case
The bank said its “bull” case for nickel had a 20% indicative probability and could see the metal rise in the near term to US$28,000/t owing to potential sanctions on Russia over its Ukraine threats and US$30,000/t if Indonesia were to meaningfully restrict supply.
“Norilsk, Russia’s biggest producer of nickel accounts for 15% of class one metal and while those tonnes could probably be diverted to China the interim period would be chaotic,” Citi said.
The banks bear case (also 20% probability) is that the nickel price falls back to US$20,000/t in the near term owing to a major de-stock from the electric vehicle supply chain, at the same time as sentiment is hurt by an increase in Indonesian supply.
EVs to accelerate demand
For investors the key takeaway from the latest Citi nickel analysis, apart from the powder-keg warning, is that nickel has become a “bifurcated” market, divided into class one metal for battery production and the traditional use in stainless steel.
“The deficit in class one material is being led by outsized demand growth from EV batteries,” Citi said. “Our base case is for 480,000t of EV nickel demand in 2022, up 140,000t from last year.”
Citi argued in an earlier report that EV penetration of the vehicle market had entered the S-curve phase of unstoppable growth, which would see demand accelerate, ensuring the lithium and other battery metals stayed higher for longer.
“EV sales have reached the point of critical mass and we see 10.7 million EV sales in 2022, driving a 160,000t per year (or 30%) increase in lithium demand, which is also positive for nickel, copper and cobalt demand,” the bank said.
But what nickel has, which the other CLANC metals lack, is two potentially unreliable suppliers, which occupy top spot on the nickel league table (Indonesia at No 1 and Russia at No 3) – high rankings which represent the potential to create chaos in the market if they withhold supply or are hit with trade sanctions.